Kyoto - End-Use Energy Demand (Industrial & Transportation)

Report#:SR/OIAF/98-03

Industrial Demand

Background

The industrial sector includes agriculture, mining, construction, and manufacturing activities. The sector consumes energy as an input to processes that produce the goods that are familiar to consumers, such as cars and computers. The industrial sector also produces a wide range of basic materials, such as cement and steel, that are used to produce goods for final consumption. Energy is an especially important input to the production processes of industries that produce basic materials. Typically, the industries that are energy-intensive are also capital-intensive. Industries within the sector compete among themselves and with foreign producers for sales to consumers. Consequently, variations in input prices can have significant competitive impacts. The most significant determinant of industrial energy consumption is demand for final output.

Although energy is an important factor of production, it is not large in terms of annual manufacturing expenditures. In 1995, for example, purchased energy expenditures were 2.3 percent of annual manufacturing outlays.⁴¹ Technology usually plays a minor role in the pattern of energy consumption, because technology tends to be used to produce new and improved final products rather than to reduce energy consumption; however, when new investments are undertaken to introduce improved production technology, steps to increase energy efficiency also are undertaken. Overall, energy prices and technological breakthroughs tend to have a rather small impact on industrial energy consumption.⁴²

The influence of energy prices on industrial energy consumption is modeled in terms of the efficiency of use of existing capital, the efficiency of new capital additions, and the mix of fuels used. This analysis uses “technology bundles” to characterize technological change in the energy-intensive industries. This approach is dictated by the number and complexity of processes used in the industrial sector and the absence of systematic cost and performance data for the components. These bundles are defined for each production process step (e.g., coke ovens) for five of the industries and for end use (e.g., refrigeration) in two of the industries. The process-step industries in the NEMS model are pulp and paper, glass, cement, steel, and aluminum.⁴³ The industries for which technology bundles are defined by end use are food and bulk chemicals.

The rate at which the average industrial energy intensity declines is determined primarily by the rate and timing of additions to manufacturing capacity. The rate and timing of additions are functions of retirement rates and industry growth rates. Typical retirement rates range from 1 percent to 3 percent annually. The current model also allows retirement rates and the energy intensity of new additions to vary as a function of price. Price elasticity of demand, which indicates the responsiveness of energy consumption to changes in energy prices, is not an explicit assumption in the model; however, the typical 20-year price elasticity ranges between -0.2 and -0.3, which indicates that a 1-percent price increase would reduce demand by 0.2 to 0.3 percent. Because the reference case approximates a constant price regime, the reference case results do not differ greatly from a situation in which all prices are held constant.

In 1996, the industrial sector’s consumption of 34.6 quadrillion Btu accounted for more than one-third of all U.S. energy consumption. The associated emissions of 476 million metric tons of carbon accounted for one-third of all U.S. carbon emissions. In 1996, although industrial energy prices were more than 50 percent lower than in 1980 (Figure 44), delivered energy consumption was only 13 percent higher than in 1980. Industrial output increased by more than 30 percent over that period. As a result, energy intensity (thousand Btu consumed per dollar of output) fell by 20 percent.

Most of the drop in energy intensity in the U.S. industrial sector occurred between 1980 and 1985, when prices for both energy and capital inputs were rising and the ability of U.S. manufacturers to compete internationally was deteriorating. The recessions of 1980 and 1981-1982 forced many less efficient plants to close, many permanently. Particularly hard hit were the primary metals industries and motor vehicle manufacturing. Output of the U.S. steel industry has never recovered to the levels of the late 1970s. Manufacturing profits did not return to the levels attained in 1981 until 1988.⁴⁴ Energy prices certainly played a role in shaping these changes in the industrial sector, but general economic conditions, recession, record high interest rates, and reduced ability of key industries to compete in international markets were more important determinants of change.⁴⁵

In the reference case, industrial energy prices are projected to increase very slightly or fall through 2010. For example, the price of natural gas is projected to increase by 0.5 percent, and the price of electricity is projected to fall by 16 percent. From 1996 to 2010, industrial output is projected to grow by 39 percent and energy consumption by only 16 percent. Industrial intensity falls by 17 percent during the same period, approximating the intensity decline between 1980 and 1996. The factors that are expected to produce the rapid decline in industrial energy intensity despite moderate changes in energy prices include a relative shift from energy-intensive to less energy-intensive industries; replacement of existing equipment with less energy-intensive equipment as existing capacity is retired; adoption of improved and less energy-intensive technologies; and the pressures of international competition.

Carbon Reduction Cases

In the carbon reduction cases, the combined effect of reduced demand for U.S. industrial output and higher energy prices produces lower energy consumption than in the reference case. Compared with the reference case in 2010, industrial output is $69 billion (1 percent) lower in the 1990+24% case, $157 billion (3 percent) lower in the 1990+9% case, and $308 billion (6 percent) lower in the 1990-3% case (see Table 29 in Chapter 6).

Compared with the reference case, average energy prices in the industrial sector in 2010 are projected to be 22 percent higher in the 1990+24% case, 55 percent higher in the 1990+9% case, and 95 percent higher in the 1990-3% case. In comparison, the industrial sector’s average energy price increased by almost 189 percent from 1970 to 1980. Prices of all fuels are projected to be higher in the carbon reduction cases, with coal prices 135 percent higher than the reference case in 2010 in the 1990+24% case and natural gas prices 33 percent higher. The projected price increase for coal is attributable solely to the projected carbon price, whereas the carbon price and higher demand contribute about equally to the increase for natural gas. In the 1990+9% case, natural gas and coal prices are projected to be 93 percent and 328 percent higher, respectively, than in the reference case, and in the 1990-3% case they are 162 percent and 589 percent higher.

Lower projections of industrial output and higher projected energy prices reduce the projections for delivered energy consumption in the industrial sector by 0.7 quadrillion Btu (2 percent) in the 1990+24% case, by 1.3 quadrillion Btu (4 percent) in the 1990+9% case, and by 2.3 quadrillion Btu (7 percent) in the 1990-3% case in 2010 relative to the reference case (Figure 45). In the 1970-1980 period, industrial consumption was unchanged even though prices increased by 189 percent. Year-to-year industrial energy consumption began to fall in 1980, and the decline accelerated when general economic conditions began to deteriorate during the 1980 and 1981-1982 recessions. Energy consumption reached its minimum in 1983, even though prices had begun to decline. These events reinforce the concept that while energy prices do play a role in industrial energy consumption, general and industry-specific economic conditions also play an important role.

Coal consumption is projected to drop sharply in the carbon reduction cases, given its extreme price disadvantage. In the 1990+24% case, coal consumption in 2010 is lower by 422 trillion Btu (16 percent) than in the reference case; in the 1990+9% case it is 737 trillion Btu (28 percent) lower; and in the 1990-3% case it is about 1 quadrillion Btu (36 percent) lower. The projected reductions in coal consumption are predominantly due to projected reductions in boiler fuel use.

The industrial sector consumes coal mainly as a boiler fuel and for production of coke in the iron and steel industry. For example, 75 percent of manufacturing consumption of steam coal was used in boilers in 1994.⁴⁶ Coal-fired boilers have substantially higher capital costs than do gas-fired boilers, because of their materials handling requirements. For large steam loads, however, coal’s price advantage over natural gas offsets its capital cost disadvantage. But in the carbon reduction cases, coal suffers from both a capital cost and a fuel cost disadvantage. As a result, a substantial amount of boiler fuel use switches from coal to natural gas and petroleum products.

The projected reduction in total steam coal consumption in the industrial sector in 2010 (including for uses other than boiler fuel) in the 1990-3% case relative to the reference case is more than 50 percent. Still, the reduction is less severe than that projected for the electric utility sector. Electricity generators, in addition to switching to natural gas, also have the available options of nuclear power and renewable energy sources.

Consumption of metallurgical coal, which is used to produce coke for iron and steel production, also is reduced sharply in the carbon reduction cases. The reduction has several causes: substitution of natural gas in production processes, replacement of domestic coke production with coke imports, replacement of some coke-based steelmaking capacity with electricity-based capacity, and reduced production of domestic steel.

In the carbon reduction cases, natural gas consumption is subject to two countervailing effects. The effect of generally higher energy prices, and consequent lower levels of industrial activity, is to reduce natural gas consumption. On the other hand, natural gas prices do not increase by as much as the prices of competing fuels. As noted above, this results in relatively greater use of natural gas as a boiler fuel. The carbon reduction cases also induce additional cogeneration using natural gas, which increases natural gas consumption and reduces requirements for other boiler fuels.

In the 1990+24% and 1990+9% cases, natural gas consumption is projected to increase slightly, because the impact of increased boiler fuel use outweighs the reduction caused by lower industrial output. In the 1990-3% case, natural gas consumption is unchanged from the reference case in 2010. Here, the drop in industrial output and the substitution for other boiler fuels have offsetting effects.

In the reference case, industrial carbon emissions are projected to be 83 million metric tons higher in 2010 than they were in 1996 (Figure 46). Emissions attributable to increased electricity consumption account for more than half the increase. In contrast, electricity-based emissions account for more than 70 percent of the emissions reductions in the carbon cases. For example, in the 1990+9% case, electricity-based carbon emissions in 2010 are 79 million metric tons lower than in the reference case. A reduction of 19 million metric tons in carbon emissions from the combustion of fossil fuels brings industrial sector emissions to approximately their 1990 level. Carbon emissions in the 1990-3% case fall to 418 million metric tons, 58 million tons below the 1996 level and 35 million tons below the 1990 level. Again, electricity-based emissions account for three-fourths of the reduction from projected levels in the reference case.

Part of the reduction in electricity-based carbon emissions for the industrial sector is due to lower electricity consumption in the carbon reduction cases (Figure 47). A larger part of the reduction results from sharply lower carbon intensity of electricity production. In the reference case, approximately 16.5 million metric tons of carbon are emitted in the production of 1 quadrillion Btu of delivered electrical energy, as compared with only 12.6 million metric tons in the 1990+9% case and only 10.2 million metric tons in the 1990-3% case (38 percent less than in the reference case).

Industrial energy intensity fell by 17 percent between 1980 and 1996. In 1996, approximately 7,100 Btu of energy was required to produce a dollar’s worth of industrial output. In the reference case energy intensity continues to fall, and in 2010 it is projected that only 5,900 Btu will be required for each dollar of industrial output. The impact of the carbon reduction cases on industrial energy intensity results from opposing effects. The effect of higher energy prices is to reduce energy intensity, whereas reduced or falling output growth limits the amount of new, less energy-intensive capital equipment that will be added to the existing stock, thereby retarding the rate of decline in energy intensity. Additional structural shifts in the composition of industrial output further reduce energy intensity. (Fuel switching contributes to reduced carbon but does not affect energy intensity.)

The projected rate of decline in industrial energy intensity is smaller in the more stringent carbon reduction cases (Figure 48). Some process steps in the energy-intensive industries approach the minimum level of energy intensity assumed to be practically achievable. In addition, in the more stringent carbon reduction cases, industrial output is more severely reduced, resulting in smaller incentives for the addition of new, less energy-intensive capital equipment. The changes in energy intensity for the industrial subsectors (Figure 49) indicate that slower growth in output can lead to less pronounced declines in energy intensity in the more stringent carbon reduction cases.

The change in aggregate industrial energy intensity can be decomposed into two effects. One is the change in energy intensity that results from a change in the composition of industrial output. For example, if the output of the most energy-intensive industries grows more slowly than other parts of the industrial sector, aggregate energy intensity will fall even though no individual industry’s energy intensity has changed. This is the “structural” effect. The other is increased energy efficiency and shifts toward less energy-intensive products in individual industries (the “efficiency/ other” effect). The relative contributions of these two effects to the reduction in aggregate industrial intensity have varied substantially over time (Figure 50).⁴⁷ For example, between 1980 and 1985, when aggregate industrial intensity fell by 3.6 percent annually, the structural and efficiency/other effects made equal contributions to the decline. Over a longer period, from 1980 to 1996, the structural effects dominated the reduction in aggregate industrial energy intensity. Similarly, in the projections, the structural and efficiency/other effects can be decomposed. About two-thirds of the projected reduction in aggregate industrial intensity is attributable to the structural effect, which is slightly larger in the carbon reduction cases than in the reference case.

Total expenditures for energy purchases in the industrial sector are projected to be $121 billion in 2010 in the reference case. In the carbon reduction cases, the effects of higher energy prices are reduced by fuel switching and reduced consumption. Nevertheless, energy expenditures in 2010 are projected to be $24 billion (20 percent) higher in the 1990+24% case and $60 billion (50 percent) higher in the 1990+9% case than in the reference case, and in the 1990-3% case they are projected to be even higher—$101 billion (83 percent) higher than in the reference case at $222 billion (Figure 51).

Sensitivity Cases

The projections of industrial sector energy expenditures in the carbon reduction cases are based on the reference case assumptions about technology improvements and likely industrial response. Expenditures would be much higher if technology improvements occurred at a slower rate than in the reference case. On the other hand, a more optimistic technology outlook would reduce energy expenditures.

To span the technology alternatives, low and high technology sensitivity cases, based on the 1990+9% carbon reduction case, were analyzed. The low technology case assumes that no additional technology changes (as reflected in energy intensity) will occur after 1998. Normal turnover of capital, however, would result in some decline in energy intensity as old equipment is replaced with currently available equipment with lower energy intensity. The high technology case assumes an aggressive private and Federal commitment to energy-related research and development, which results in successful commercialization of energy-saving technologies.⁴⁸

As noted earlier, the analysis uses technology bundles to characterize technological change in the energy-intensive industries. This approach is illustrated in Table 9. For example, the energy intensity of the paper-making process step in the pulp and paper industry is 19 percent lower in the 1990+9% case than in the low technology sensitivity case. For the same process step, energy intensity is 36 percent lower in the high technology case than in the low technology case. For some process steps where the change in intensity is very small, the higher energy prices in the 1990+9% case lead to a slightly lower intensity than in the high technology case, where energy prices are lower. (The technology cases were modeled across all sectors simultaneously. The resulting lower consumption in the high technology case also resulted in lower prices.) paper-making process step in the pulp and paper industry is 19 percent lower in the 1990+9% case than in the low technology sensitivity case. For the same process step, energy intensity is 36 percent lower in the high technology case than in the low technology case. For some process steps where the change in intensity is very small, the higher energy prices in the 1990+9% case lead to a slightly lower intensity than in the high technology case, where energy prices are lower. (The technology cases were modeled across all sectors simultaneously. The resulting lower consumption in the high technology case also resulted in lower prices.)

Cogeneration Systems

A key issue facing power producers and their customers is whether the types of cogeneration systems currently used in the United States will be extended to include district energy systems and advanced turbine systems (ATS). Cogeneration systems, also called combined heat and power systems, simultaneously produce heat in the form of hot air or steam and power in the form of electricity by a single thermodynamic process, usually steam boilers or gas turbines, reducing the energy losses that occur when process steam and electricity are produced independently. Thus, cogeneration systems could play a significant role in reducing U.S. greenhouse gas emissions.

In 1996, electric utilities used more than 21 quadrillion Btu of energy from the combustion of coal, natural gas, and oil to produce the equivalent of only 7 quadrillion Btu of electricity available at the plant gate, representing a conversion loss of 67 percent.^a Consequently, unused waste heat at utility plants accounted for 346 million metric tons or nearly 24 percent of U.S. carbon emissions in 1996. Additional losses on the order of 7 percent are incurred during transmission and distribution of electricity to customers.^b Because cogeneration systems capture and use a significant portion of the waste heat energy, they are nearly twice as efficient as conventional power plants in extracting usable energy. About 6 percent of total U.S. generating capacity includes some type of cogeneration system, in such diverse industries as manufacturing, mining, and refining.^c

Some energy analysts believe that there is even greater potential to increase the penetration of cogeneration systems and reduce carbon emissions by wide-scale construction of district energy systems.^b District energy systems distribute chilled water, steam, or hot water to buildings to provide air conditioning, space heating, domestic hot water, and industrial process energy. About 5,800 district energy systems are installed in the United States, serving more than 8 percent of commercial floorspace—primarily military bases, universities, hospitals, downtown areas, and other group buildings.^d

The greatest growth potential for district energy systems is in the area of utility-financed cooling systems for downtown areas where there is a large amount of commercial floorspace located in a relatively small area; however,

significant hurdles must be overcome if the potential is to be realized. Siting one or more power and steam generators in an area already dense with buildings could prove to be a challenge, as could the installation, maintenance, and repair of lines to carry steam and hot or chilled water supplies in cities with under-street congestion of existing gas, water, sewage, and electricity lines. Also, construction costs for district energy systems are about one-third higher than those for conventional generating technologies.

Although it is possible that fuel cost savings over the life of a district energy plant could offset its higher initial construction cost, electricity producers might be reluctant to invest significant capital during a period of regulatory reform. Even after the current restructuring process in U.S. electricity markets is completed, the risk of nonrecovery of capital for capital-intensive technologies in a competitive environment will make finding investors in such projects a challenge. Moreover, the development of a district energy system involves the coordinated effort of local and State governments, investors, and the community as a whole, together with the subsequent legal, financial, and environmental issues that arise with the inclusion of many and diverse stakeholders.

Another technology that some energy analysts believe could significantly reduce greenhouse gas emissions is the next-generation, very-high-efficiency ATS. These turbines are expected to operate, at minimum, 5 to 10 percent more efficiently than steam boilers and to cost less than $350 per kilowatthour when used as a simple-cycle turbine.^b Their small size (5 megawatts) and short construction and delivery schedule (18 months) result in relatively smaller capital outlays and faster capital recovery, which are expected to give them an economic advantage over large central-station turbines.

Commercialization of ATS turbines is not expected until 2001, and penetration is expected to occur first where there is a need to satisfy internal power and steam requirements at industrial and large commercial establishments. But large-scale penetration of the ATS technology as envisioned by its advocates depends on the development of a significant niche market for this cogeneration system—a market characterized as having a small, but not constant, demand for steam. ATS in electric-only mode may not be competitive with other primary power technologies, and a constant demand for steam could be satisfied more economically by conventional gas and combined-cycle steam boilers.^b Consequently, the competitiveness of ATS with other generating technologies depends on locating markets with an optimal demand for steam during part of the day and maximum demand for electricity for the remainder of the day, even during off-peak periods. Few, if any, power markets would meet such stringent criteria.

^aEnergy Information Administration, Annual Energy Review 1996, DOE/EIA-0384(96) (Washington, DC, July 1997).
^bInterlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies, “Scenarios of U.S. Carbon Reductions,” LBNL-40533, ORNL/CON-444 (September 1997).
^cEnergy Information Administration, Annual Energy Outlook 1998, DOE/EIA-0383(98) (Washington, DC, December 1997).
^dSee web site www.energy.rochester.edu/us/climate/abstract.htm, “District Energy in U.S. Climate Change Strategy.”

In the 1990+9% low technology case, industrial energy expenditures in 2010 are projected to be nearly double those in the 1990+9% carbon reduction case and $110 billion higher than those in the reference case. In the high technology sensitivity case, energy expenditures are projected to be only $23 billion higher than in the reference case, which has no carbon reductions, in 2010. The high technology case reduces, but does not eliminate, the impact of higher energy prices, producing $37 billion in savings attributable to the assumed technology advances (Figure 51).

Another sensitivity case for the 1990+9% carbon reduction case was implemented to examine the impacts of alternative assumptions about the use of cogeneration and biomass for electricity generation. These assumptions reflect the possibility that natural gas cogeneration and biomass could be used more extensively than projected in the other cases. Natural-gas-fired cogeneration is posited to be a function of two economic factors. One is demand for process steam, with higher demand leading to more cogeneration. (In the carbon reduction cases, industrial steam demand is reduced because the requirements for process steam fall when industrial output falls.) The other is the spread between electricity and natural gas prices, with a higher price difference leading to more gas-fired cogeneration. The assumption used here is that natural-gas-fired cogeneration is more responsive to increasing prices.

Industrial biomass consumption is dominated by activities in the pulp and paper industry, where biomass residue and pulping liquor are used to supply more than half the industry’s energy requirements. Consumption of biomass residue and pulping liquor is a function of the industry’s output. Consequently, biomass consumption tends to fall in the carbon reduction cases, because industrial output is projected to be lower. The 1990+9% aggressive cogeneration/biomass sensitivity case assumes that the reduction in biomass consumption will be attenuated by additional biomass recovery and utilization. Additional biomass recovery also leads to an increase in cogeneration from biomass, which further reduces the requirements for other fossil fuels.

The aggressive cogeneration/biomass case results in a 9-percent increase (20 billion kilowatthours) in the level of gas-fired cogeneration in 2010 relative to the reference case (Figure 52). This is smaller than the change seen in the high technology sensitivity case, because industrial output is lower in the aggressive cogeneration/biomass sensitivity than in the high technology case. (Industrial output is lower in the aggressive cogeneration case than in the high technology case, because the projected energy prices are higher in the aggressive cogeneration case.) Biomass consumption in 2010 is projected to be 1.2 percent (27 trillion Btu) higher in the aggressive cogeneration/biomass sensitivity case than in the reference case (Figure 52). As with cogeneration, this increase is slightly less than the change seen in the high technology sensitivity case, again because of the lower industrial output projected in the aggressive cogeneration/ biomass case. Projected energy expenditures in the industrial sector in 2010 in this sensitivity case are $15 billion less than in the 1990+9% case. It should be noted that neither the cost nor the likelihood of achieving the assumed changes in the high technology or aggressive cogeneration/biomass sensitivity case has been evaluated. Instead, the experiments were an attempt to span the range of possible outcomes.

Industrial Composition

Because non-Annex I countries are not required to reduce emissions under the Kyoto Protocol, their energy prices are likely to be lower than those in the Annex I countries, including the United States. As a result, more energy-intensive industries could migrate from areas with high energy costs, and those that remain could lose markets to lower-cost foreign competition. Energy-intensive industries also may face reduced demand as consumers shift their consumption patterns to less energy-intensive goods and services. There are several counter arguments to this hypothesis: the relatively small share of energy expenditures in annual manufacturing expenditures makes the impact of differential energy prices relatively unimportant; energy prices are not important determinants of international trade or capital flows, which implies that U.S. energy-intensive industries are not likely to be seriously affected by an energy price disadvantage; and a large number of business opportunities related to climate change mitigation will become available both domestically and in non-Annex I countries. Needless to say, there are widely divergent points of view about the likelihood of significant industrial migration and the extent of adverse impacts on U.S. industry.^a An analysis of the change in industrial composition, which would require an analysis of all the relative costs of manufacturing inputs, of which energy costs are only one, monetary issues, and international trade issues, is beyond the scope of this report.

One published study has attempted to evaluate the potential effects of differential changes in international energy prices on the U.S. industrial sector. The study was conducted by Argonne National Laboratory in a workshop format (see Argonne National Laboratory, The Impact of High Energy Price Cases on Energy-Intensive Sectors: Perspectives from Industry Workshops (July 1997)). Industry-specific discussion papers circulated to workshop participants contained analyses that examined impacts for each individual industry, assuming no price changes for other industries or markets. The industries affected and the percentage reductions in projected industrial output in the reference case were as follows: bulk chemicals, 28.5; aluminum, 13.7; pulp and paper, 10.2; steel, 30.5; and cement, 38.2.

A second study was conducted at EIA’s request by Charles River Associates (CRA),^b using a more general approach. Explicit linkages to international trade were a fundamental part of the modeling framework for the study, which was conducted under assumptions similar to those of the 1990+14% carbon reduction case in this analysis. The industries affected and the percentage reductions from reference case output projections were as follows: total chemicals, 3.9; nonferrous metals, 1.5; pulp and paper plus printing, 0.7; steel, 1.4; and nonmetallic minerals, 1.4. The percentage output reductions from the comparable NEMS case (1990+14%) are about double the CRA values: nonferrous metals, 4.4; pulp and paper plus printing, 2.0; steel, 3.1; and nonmetallic minerals, 3.5. The exception is total chemicals for which the NEMS results project a slightly smaller reduction of 3.5 percent. The projections from NEMS, which estimates only domestic output reductions, and from CRA, which treated both international capital flows and domestic output reductions, are significantly lower than those from the Argonne National Laboratory study.

In view of the above results, it is difficult to distinguish the effects of reduced output from those that could result from industrial migration abroad in response to differences in international energy prices. There are many analytical complexities in the assessment of potential effects of carbon reductions on industrial output. A complete analysis of the issue would require consideration of all input costs, including infrastructure and locational advantages, monetary issues, and trade issues. Significant additional research would be required to examine the differential impacts of climate change policies on the United States and other countries.

^aThe following authors provide a sample of the breadth of disagreement in this area: American Petroleum Institute, Impacts of Market-Based Greenhouse Gas Emission Reduction Policies on U.S. Manufacturing Competitiveness, January 1998; American Automobile Manufacturers Association, Economic Implications of the Adoption of Limits on Carbon Emissions from Industrialized Countries, November 1997; Argonne National Laboratory, The Impact of High Energy Price Cases on Energy-Intensive Sectors: Perspectives from Industry Workshops, July 1997; Matthewson, et al., The Economic Implications for Canada and the United States of International Climate Change Policies, 1997 Canadian Energy Research Institute Environment-Energy Modeling Forum, October 1997; Repetto, et al., U.S. Competitiveness is Not at Risk in the Climate Negotiations, (World Resources Institute, October 1997); and WEFA, Inc., Global Warming: The High Cost of the Kyoto Protocol, National and State Impacts, 1998.

^bCharles River Associates, Report to the Energy Information Administration (August 1998).

Transportation Demand

Background

In terms of primary energy use in 1996, transportation sector carbon emissions, which almost equaled industrial carbon emission levels, were the second highest among the end-use demand sectors. Nearly 33 percent of all carbon emissions and 78 percent of carbon emissions from petroleum consumption originate from the transportation sector. In the reference case, carbon emissions from transportation are projected to grow at an average annual rate of 1.9 percent to 2010, compared with 1.4 percent for the commercial sector and 1.2 percent for both the residential and industrial sectors. In addition, transportation is the only sector with increasing carbon emissions projected for the period from 2010 to 2020 in the carbon reduction cases. Therefore, if there are no specific initiatives to reduce carbon emissions in the transportation sector, especially beyond 2010, increasing pressure may have to be exerted in the other sectors in order to reach and then maintain 2010 carbon emissions targets beyond 2010.

Consumers select light-duty vehicles (cars, vans, pick-up trucks, and sport utility vehicles) based on a number of attributes: size, horsepower, price, and cost of driving; weighting these attributes by their personal preferences. This analysis uses past experience to determine the weights that each of these attributes have in terms of consumer preferences for conventional vehicles. Technologies are represented by component (e.g., front wheel drive, electronic transmission type) with each technology component defined by a date of introduction, a cost, and a weight that indicates its impact on efficiency and horsepower. The vehicles are categorized by the 12 size classes for cars and light trucks defined by the Environmental Protection Agency and includes 2 conventional engine technologies, and 14 alternative fuel vehicle engine technologies. Technologies penetrate based on both their cost-effectiveness and by consumer preference based on past experience with similar technologies in the automotive industry. Consumers are assumed to consider only current energy prices when evaluating technologies. However, it is assumed that the automobile industry requires 3 years for minor technology makeovers and 5 years for major redesigns, estimating future fuel prices based on their rate of growth in the past 3 to 5 years. Therefore, manufacturers consider whether future fuel prices will enable their technologies to be cost-effective from a consumer standpoint.

Penetration of alternative-fuel vehicles is based on four consumer criteria—vehicle price, cost of driving per mile, vehicle range, and availability of refueling stations. Each of these attributes is weighted according to consumer surveys and expected changes over the forecast period as a result of technological improvements, larger scales of production, the availability and cost of fuel-saving technologies, and the availability of alternative-fuel refueling stations as more alternative-fuel vehicles penetrate the market. Production levels for alternative-fuel vehicles are constrained by the lead time to switch production to a particular technology and the availability of technologies in each size class.

Depending on per capita income, fuel prices, and fuel economy, consumers may switch to either smaller size classes or smaller vehicles with lower horsepower requirements within a size class. The trend in vehicle sales toward or away from light trucks (vans, sport utility vehicles, and pickups) is determined by fuel prices. Vehicle travel is determined by the cost of driving per mile and per capita income. For flex-fuel or bi-fuel alternative-fuel vehicles, the percentage use of each fuel is based on the price differential between gasoline and the alternative fuel.

Responding to changes in fuel prices, gasoline has a 2-year demand elasticity of -0.25 and a 20-year elasticity of -0.45. In the long term, consumers are expected to alter their purchasing patterns and manufacturers to incorporate more fuel-saving technologies. Because fuel use for freight trucks and trains depends primarily on requirements for freight movement as a result of economic activity and the slow turnover of the stock, distillate fuel has lower 2-year and 20-year price elasticities, at -0.09 and -0.13, respectively. In addition to fuel prices, business and personal air travel also depend on gross domestic product (GDP) and per capita income, respectively, and have very slow rates of stock turnover. Jet fuel has 2-year and 20-year elasticities of -0.12 and -0.15.

Energy intensity in the transportation sector is defined as energy use (in terms of gallons of gasoline) per vehicle per year. In the reference case, transportation energy intensity in 2010 is projected to be about 635 gallons of gasoline per vehicle, or about 53 gallons per month (Figure 53). Energy intensity in the 1990+24% case is lower than in the reference case but only by 12 gallons of gasoline per car per month. In the 1990+9% case, the projected energy intensity in 2010 is almost 53 gallons lower—equivalent to 1 month’s use of gasoline. In the 1990-3% and 1990-7% cases, the corresponding reductions in gasoline consumption in 2010 are equivalent to nearly 1.5 and 2 months of gasoline use, respectively.

In the absence of fuel price changes, transportation energy intensity will change in response to stock turnover, technology availability, and income effects (Table 10). Because 1998 prices are lower than those projected for 2010 in the reference case, vehicle-miles traveled would be higher and fuel efficiency lower than in the reference case if the 1998 price level continued. Constant 1998 fuel prices would slightly increase air travel, but aircraft efficiency levels would not decline relative to those in the reference case. More air travel would necessitate higher aircraft stock levels in 2010, but the increase would be more than offset by higher levels of travel per plane. Freight truck fuel intensity would not change with constant prices, because freight travel is determined primarily by economic activity rather than fuel prices. The slightly lower fuel prices in the constant price case would not be enough to lower the fuel economy of freight trucks relative to their projected fuel economy in the reference case.

Carbon Reduction Cases

The transportation sector is the only sector that does not reach 1990 carbon emissions levels by 2010 in any of the carbon reduction cases (Figure 54). In the reference case, energy demand in the transportation sector is projected to exceed 1990 levels by approximately 10.7 quadrillion Btu in 2010, a 49-percent increase (Figure 55). The corresponding increases are 9.4 quadrillion Btu in the 1990+24% case, 8.6 quadrillion Btu in the 1990+9% case, and 6.6 quadrillion Btu in the 1990-3% case.

Relative to the reference case, only 14 percent of the projected reduction in total energy demand for all sectors in 2010 occurs in the transportation sector in the 1990+24% case, 19 percent in the 1990+9% case, and 24 percent in the 1990-3% case. In the 1990-3% case, the reduction in carbon emissions from all sectors in 2010 is approximately 492 million metric tons, of which 18 percent comes from the transportation sector.

Light-Duty Vehicles

Travel Demand. Light-duty vehicle travel (cars, pickup trucks, vans, and sport utility vehicles) in 2010 is projected to be 1.3 percent lower than in the reference case in the 1990+24% case, 5.2 percent lower in the 1990+9% case, and 11.2 percent lower in the 1990-3% case (Figure 56). Declines in light-duty vehicle travel have been seen historically in 1973-1974 (2.7 percent) and 1979-1980 (1.6 percent). In the 1990+24% and 1990+9% cases, the levels of light-duty vehicle travel rise between 2005 and 2008, they are projected to decline by an average of 1.2 percent per year over the same period in the 1990-3% case (comparable to the rate of decline from 1979 to 1980). In 1973-1974 and 1979-1980, disposable per capita income was declining, at 0.7-percent and 0.3-percent annual rates, respectively. Those historical declines in income per capita, combined with rising fuel prices, further reduced vehicle travel. In contrast, from 2005 to 2008 income per capita is projected to rise at an average annual rate of 0.8 percent, more than twice the projected rate in the reference case, partially offsetting the reductions in travel that are expected to accompany higher fuel prices.

Slowing growth in vehicle-miles traveled is projected even in the reference case, for several reasons. First, as the “baby boomers” age, they are expected to drive less (although they probably will drive more than previous generations of the same age group).⁴⁹ Second, as more women have entered the workforce over the past three decades, resulting in more two-income households, female drivers have logged more vehicle-miles of travel; however, that growth will eventually slow as the vehicle-miles traveled by women approaches that of men. Finally, consumers have been keeping their vehicles longer than in past decades, and older cars tend to be driven less than newer cars. A countervailing trend is the recent growth in purchases of light trucks, which are driven 4.7 percent more per year than cars. In the carbon reduction cases, a reversal of this trend back to car sales as a result of higher fuel prices is expected, leading to slower growth in vehicle-miles traveled.

After 2010, vehicle-miles of travel, total fuel use, and total carbon emissions for light-duty vehicles are projected to begin rising again in the 1990-3% case and to continue on an upward path through 2020, paralleling the trends in the reference, 1990+24%, and 1990+9% cases for the later years of the forecast. There are three reasons for the continued growth in vehicle-miles traveled after 2012. First, carbon prices are projected to decline in most cases after 2010. Second, lower demand for gasoline is projected to result in lower refining costs, lower world oil prices, and lower gasoline prices. Finally, increases in disposable income after 2012—particularly after 2015, when the U.S. average disposable income in the 1990+24%, 1990+9%, and 1990-3% cases is expected to exceed that projected in the reference case as the economy rebounds from the initial response to carbon reduction efforts—lead to more rapid increases in light-duty vehicle travel from 2012 through 2020.

Increased telecommuting, which is assumed to reduce vehicle-miles traveled by 0.13 percent in 2000 according to the Climate Change Action Plan,⁵⁰ is also assumed in all the cases for this analysis, resulting in fuel savings of 21.6 trillion Btu in 2000. The 0.13-percent reduction is assumed to continue throughout the projections, so that as vehicle-miles traveled increase over time, the savings from telecommuting increase proportionately.

Fuel Efficiency. In the carbon reduction cases, the fuel economy of newly purchased light-duty vehicles in 2010 is expected to be higher than projected in the reference case. Higher fuel prices are expected to encourage the development of advanced fuel-saving technologies, as well as changes in consumer purchasing patterns. For example, average fuel efficiency for all new light-duty vehicles in 2010, projected to be just under 25 miles per gallon in the reference case, surpasses 27 miles per gallon in the 1990+9% case (Figure 57), and even higher levels might be achieved with more rapid advances in technology, as described in the discussion of sensitivity cases below. The projections of new vehicle fuel efficiency in the reference, 1990+24%, 1990+9%, and 1990-3% cases in 2010 are as follows: for cars, 30.6, 32.0, 33.6, and 35.6 miles per gallon; and for light trucks, 20.4, 21.2, 22.1, and 23.3 miles per gallon.

In the past, a 4.3-percent average annual increase in new car fuel efficiency was achieved by automobile manufacturers from 1976 to 1988. Thus, the projected increases of 0.9 percent per year from 1996 to 2010 in the 1990+24% case, 1.3 percent per year in the 1990+9% case, and 1.7 percent per year in the 1990-3% case appear to be possible. On the other hand, those historical improvement rates resulted from the introduction of fuel-saving technologies that involved radical changes in structural design and were relatively inexpensive to implement. For example, space and size reductions resulting from downsizing to front wheel drive designs actually reduced costs while also permitting the spatial redesign of engine compartments, but further downsizing and weight reductions may be difficult to achieve, because they could eliminate larger vehicles from the marketplace and, possibly, increase the safety concerns associated with smaller light-weight vehicles. Diminishing returns to scale have limited the potential for future fuel savings, because many of the least expensive options have already been implemented.

Light trucks have not achieved fuel efficiency improvements equivalent to those for automobiles, because consumers have sought higher horsepower for personal use (particularly in sport utility vehicles), hauling (pickup trucks), and commercial applications (standard vans). Historically, the highest average annual growth rate in fuel efficiency for new light trucks was 2.9 percent per year from 1976 to 1986. In contrast, light truck fuel economy is projected to grow by only 0.1 percent annually in the 1990+24% case, 0.4 percent annually in the 1990+9% case and 0.8 percent annually in the 1990-3% case between 2000 and 2010. Lower growth rates occur for light trucks in the carbon reduction cases than historically because of the difference described above regarding inexpensive and one time technological improvements.

Among the 55 fuel-saving technologies that are assumed to be available to manufacturers of light-duty vehicles in the reference and carbon reduction cases, the most significant market penetration is expected for drag reduction, continuously variable transmissions, electronic transmission controls, cylinder friction reduction technologies, advances in low-rolling-resistance tires, variable valve timing, and accessory control units (Table 11). Aerodynamic improvements (drag reduction) have already been implemented on many vehicles, but further market penetration may be possible, especially in the larger size classes. Continuously variable transmissions match the gear ratio in a continuous manner over the wide spectrum of gear ratios demanded by the engine, rather than having a discrete number of gears. Electronic transmission controls assist the transmission by matching more precisely the gear to be used with a given engine load. Cylinder friction reduction technologies, such as low-friction pistons and rings, lower the thermal and mechanical losses of the engine. Low-rolling-resistance tires limit energy losses from friction between tires and road surfaces. Variable valve timing improves the thermal efficiency of an engine by precisely timing when the ignition sparks within the cylinder. Electronic controls and electric motors for accessory drives on vehicles (cooling fan, water pump, alternator, power steering and windows) could improve fuel economy by reducing engine loads.

Changes in consumer purchasing patterns also are expected to contribute to the fuel economy improvements for light-duty vehicles in the carbon reduction cases. For that to happen, however, trends in consumer choices over the past decade would have to be reversed. With low fuel prices and high disposable income per capita, average fuel economy has been flat from 1990 to 1996. Consumer purchases have tended toward larger cars and light trucks, especially sport utility vehicles, and there has been a growing preference for light trucks over cars. Similarly, within each size class, consumers have tended to purchase cars and light trucks that are larger and have more horsepower.

In 1996, compact cars accounted for 45 percent of new automobile sales, an increase from 34 percent in 1990; however, the subcompact share of new car sales fell from a high of 26 percent in 1991 to 19 percent in 1996. Small pickup trucks, which captured 25 percent of the market for new light trucks in 1990, reached a low of 19 percent in 1996. Concurrently, standard and compact sport utility vehicles, which had only a 20-percent share of the light truck market in 1990, had a 45-percent share in 1996. The average fuel economy of small pickup trucks is 26.3 miles per gallon, as compared with 21.3 miles per gallon for small utility trucks and 18.1 miles per gallon for large sport utility vehicles, which are now growing in share at a much faster pace than even small utility trucks. Sales of large sport utility vehicles increased from 3.3 percent of all new light truck sales in 1991 to a high of 10.3 percent in 1996. In addition, sales of small vans, which currently have an average fuel economy rating of about 22.7 miles per gallon, are being displaced by sales of small and large sport utility vehicles. With a large supply of sport utility vehicles available to consumers and a lack of station wagons designed from sedan autos, which have a much higher fuel efficiency rating, the fuel economy options for new vehicle buyers are becoming limited.

With higher fuel prices in the carbon reduction cases in 2010 than in the reference case, it is projected that size class shares will return to near 1976 levels. The subcompact share of new car sales in 2010 is projected to be 15 percent in the 1990+24% case, 19 percent in the 1990+9% case, and 24 percent in the 1990-3% case, compared with 12 percent in the reference case (Figure 58). Similar trends are projected for all size classes in the carbon reduction cases, as consumers move their vehicle purchases down to lower size classes and sales of compact, mid-size, and large cars are reduced. Although shifting vehicle lines back to production of smaller cars would require major changes in production facilities, the lead time associated with those changes has narrowed from about 4 years to 2 years.

Since 1990, the growth in light trucks sales at the expense of car sales, and the growth in sales of standard and compact sport utility vehicles and minivans at the expense of station wagons has slowed the rate of improvement in efficiency for new light-duty vehicles. Light truck sales shares have grown from about 37 percent of all light-duty vehicle sales in 1990 to 43 percent in 1997, with a net loss on average of more than 8 miles per gallon between new cars and light trucks. In 2010, light trucks sales are projected to be 46.1 percent of light-duty vehicle sales in the 1990+24% case, 44.4 percent in the 1990+9% case, and 42.5 percent in the 1990-3% case, compared with 47 percent in the reference case. Reversing the trend back toward cars and away from truck purchases will not be costless, however. Vehicle manufacturers reap much higher profits from sales of light trucks than from car sales. In addition, consumers may have difficulty finding fuel-efficient vehicles suitable for larger families with the disappearance of many station wagons from the new car market.

Horsepower. Growth rates in new vehicle horsepower in the light-duty vehicle market are currently at their highest historical levels. From 1990 to 1997, new vehicle horsepower increased at annual rates of 3.2 percent for cars and 4.3 percent for light trucks. Between 1996 and 2010, horsepower for both cars and light trucks is projected to increase at an annual rate of 2.4 percent in the reference case, as a result of high per capita incomes and low fuel prices. The higher fuel prices in the carbon reduction cases are projected to lower the growth rate of horsepower for cars to 1.9 percent between 1996 to 2010 in the 1990+24% case, 1.2 percent in the 1990+9% case, and 0.3 percent in the 1990-3% case (Figure 59).

Fuel Consumption. Reductions in fuel use by light-duty vehicles (cars, pickup trucks, vans, and sport utility vehicles) are projected to account for more than two-thirds of the reduction in transportation energy consumption in 2010 in the carbon reduction cases relative to the reference case projections. In the reference case, light-duty vehicles are responsible for 57 percent of all transportation use in 2010 (Figure 60). The difference in gasoline consumption by light-duty vehicles (Figure 61) results from both a decline in vehicle-miles traveled and an increase in new car and light truck efficiency in response to higher gasoline prices and lower levels of disposable income. As fuel-saving technologies penetrate the light-duty vehicle market, higher fuel efficiencies lower the cost of driving per mile, which increases vehicle travel, offsetting some of the fuel savings.⁵¹ The increase in fuel efficiency also reduced the demand for gasoline, leading to lower gasoline prices than would otherwise have occurred. Gasoline prices in real 1996 dollars in 2010 are projected to be 14 cents per gallon higher in the 1990+24% case than in the reference case, 30 cents per gallon higher in the 1990+9% case, and 55 cents per gallon higher in the 1990-3% case. Comparable increases in gasoline prices were last seen during the oil crisis of 1973-1974 (33 cents a gallon in 1996 dollars) and during the oil embargo of 1979-1980 (47 cents a gallon).

Air Travel

Personal, business, and international air travel are expected to decline in response to higher jet fuel prices and higher ticket prices in the carbon reduction cases, as compared with the reference case, from 2005 through 2015. The projected levels of air travel in 2010 are 1.4 percent lower in the 1990+24% case than in the reference case, 7.4 percent lower in the 1990+9% case, and 16.0 percent lower in the 1990-3% case. Higher fuel prices in 2010 are projected to increase ticket prices by 5 percent, 13 percent, and 23 percent in the 1990+24% case, 1990+9% and 1990-3% cases, respectively, over the reference case prices. Lower merchandise exports (0.9 percent lower in the 1990+24% case, 2.5 percent in the 1990+9% case, and 4.9 percent in the 1990-3% case than in the reference case) have comparable effects on dedicated air freight travel.

Between 2005 and 2008, air travel is projected to decline by 1.2 percent annually in the 1990-3% case as a result of a 19-percent average annual increase in jet fuel prices. In comparison, air travel declined by 2.2 percent from 1980 to 1981, when jet fuel prices increase by 49 percent. Similar to light-duty vehicles, differences in the responses to higher fuel prices between history and the carbon reduction cases can be explained by comparing growth rates in income levels. Income during 2005 to 2008 is expected to increase by 0.8 percent annually in the carbon reduction cases, however from 1980 to 1981 income was rising even faster at 2.3 percent per year, which mitigated the decline in air travel.

In 2010, the projected use of jet fuel is lower by 1.4 percent in the 1990+24% case than in the reference case, by 6.6 percent in the 1990+9% case, and by 14.2 percent in the 1990-3% case (Figure 61). Jet fuel prices are projected to be 15 cents per gallon higher than in the reference case in 2010 in the 1990+24% case, 34 cents per gallon higher in the 1990+9% case, and 63 cents per gallon higher in the 1990-3% case.

Only relatively minor changes in the average fuel efficiency of new aircraft are expected to result from the imposition of carbon reduction targets. For example, in the 1990+9% case, new aircraft fuel efficiency is projected to improve at an annual rate of just 0.9 percent between 1996 and 2010, compared with the 0.7-percent rate projected in the reference case. As a result, the average efficiencies projected for the entire U.S. stock of aircraft are nearly the same in the two cases (Figure 62).

Less air travel is expected in the carbon reduction cases than in the reference case, leading to slower rates of aircraft stock turnover, which in turn limit the penetration of new aircraft into the aircraft stock. Higher fuel prices and lower air travel in the carbon reduction cases lower the demand for wide-body aircraft, which have higher efficiencies in terms of seat-miles per gallon than do narrow-body aircraft. In addition, near-term aircraft technologies that can improve fuel efficiency are limited, and they are not expected to be cost-effective even in the 1990-3% case. Among the six advanced aircraft technologies available by 2010, only weight-reducing materials and ultra-high-bypass engines, which are currently in use, are expected to penetrate the market (Table 12); and only the ultra-high-bypass engine technology is projected to achieve significant penetration (more than 90 percent) by 2010, and then only in the 1990-3% case or the high technology sensitivity case described below.

Freight Trucks, Rail, and Shipping

The projected demand for distillate fuel, used primarily for freight trucks and rail, is also lower in the carbon reduction cases than in the reference case in 2010—by 2 percent in the 1990+24% case, by 4.9 percent in the 1990+9% case, and by 8.3 percent in the 1990-3% case (see Figure 61). Distillate fuel prices are projected to be 15 cents per gallon higher in the 1990+24% case, 37 cents per gallon higher in the 1990+9% case and 68 cents higher in the 1990-3% case. These increases are larger than those projected for gasoline because of the higher carbon content of distillate fuel.

Higher fuel prices do not result in as much change in travel and efficiency for freight trucks and rail as they do for light-duty vehicles. Because of the slow turnover in the stock of freight trucks and rail and the high power requirements of the engines used to move freight, fuel savings are limited. The main source of reductions in distillate fuel use is the response to overall lower economic activity and demand for goods by 2010 in the carbon reduction cases, leading to lower freight travel for both trucks and rail. Lower demand for goods in the 1990+24%, 1990+9% and 1990-3% cases results in levels of freight truck travel that are 1.3 percent, 2.4 percent and 4.9 percent lower, respectively, in 2010 than projected in the reference case. Declines in coal consumption and production also lead to further cuts in rail travel as described below.

The potential for improvement in fuel economy for freight trucks is also limited. In the reference case, the fuel efficiency of new freight trucks is projected to increase by only 0.6 percent per year between 1996 and 2010. Even with higher distillate fuel prices in the 1990-3% case, the efficiency for new freight trucks improves at an annual rate of only 0.8 percent. As a result of the lower demand for goods and slower turnover in the stock of freight trucks projected in the 1990+9% case relative to the reference case, there is almost no difference in the projected average stock efficiencies for the two cases in 2010 (Figure 63).

The number of advanced technologies available for freight trucks is relatively small. Those with the greatest potential are advanced aerodynamics, the turbo-compound diesel engine, and the LE-55 heat engine, with expected marginal fuel efficiency improvements of approximately 25, 10, and 17 percent, respectively (Table 13). In all the carbon reduction cases, the advanced aerodynamics technology is projected to achieve the greatest efficiency improvements and highest penetration rates for both medium- and heavy-duty trucks. The turbo-compound diesel engine and the LE-55 heat engine do not penetrate the market until after 2010, except in the high technology sensitivity cases.

In percentage terms, the projections for rail and ship freight travel in 2010 show the sharpest reductions relative to the reference case in the carbon reduction cases. Rail freight travel is 9 percent, 23 percent, and 32 percent lower in 2010 in the 1990+24%, 1990+9%, and 1990-3% cases than in the reference case. Since more than 40 percent of rail travel is for coal transportation, the lower rail travel in the carbon reduction cases is primarily due to the projected reductions in coal production of 20 percent, 52 percent, and 71 percent in the 1990+24%, 1990+9%, and 1990-3% cases relative to the reference case. Domestic freight travel by ship is projected to be 3 percent, 6 percent, and 10 percent lower in the three cases than in the reference case. Domestic shipping is not expected to be affected as adversely by the decline in coal production as is rail traffic; however, with lower demand for goods and industrial production in the carbon reduction cases, domestic shipping is also projected to be lower.

Like freight truck and rail travel, shipping is affected more by the impacts of carbon prices on travel and shipping requirements than by the direct impacts of higher fuel costs. High-carbon residual fuel has the largest projected price increases of all the transportation fuels, with increments of 19 cents per gallon in the 1990+24% case, 46 cents in the 1990+9% case, and 84 cents—almost 100 percent—in the 1990-3% case relative to the prices projected for 2010 in the reference case.

Approximately 15 to 17 percent of the drop in total fuel consumption in 2010 in the carbon reduction cases is attributed to aircraft, 6 to 7 percent to freight trucks, 4 to 6 percent to rail engines, and 1 percent to marine engines. The relative energy consumption shares for the major transportation modes and fuels do not vary significantly across the cases (Table 14).

Both freight rail and domestic shipping efficiencies are projected to remain at reference case levels in the carbon reduction cases. Stock turnover will virtually cease, because rail ton-miles traveled are lower by 32 percent in 2010 in the 1990-3% case than in the reference case, and domestic shipping travel is 10 percent lower. Also, with the loss in revenue associated with the projected lower levels of travel, efficiency improvements will be difficult to achieve.

Alternative-Fuel Vehicles

According to consumer surveys, alternative-fuel vehicle sales are dependent on vehicle price, the cost of driving per mile, vehicle range, fuel availability, and commercial availability. In 2010, alternative-fuel vehicle sales as a percent of light-duty vehicle sales are projected to increase to 11.98 percent in the 1990+24% case, 12.07 percent in the 1990+9% case, and 12.10 percent in the 1990-3% case from 11.91 percent in the reference case. The projected market shares for alternative-fuel vehicles are higher in the carbon reduction cases primarily because higher fuel prices would encourage consumers to take advantage of the higher fuel efficiencies and lower costs of driving projected for some alternative-fuel vehicles relative to gasoline vehicles. In addition, as the fuel efficiency of alternative-fuel vehicles improves, their driving range will increase.

Although alternative-fuel vehicle sales increase in percentage terms relative to the reference case in 2010, the actual number of alternative-fuel vehicles sold is expected to be smaller in the carbon reduction cases as a result of projected declines in light-duty vehicle sales overall. In the reference case alternative-fuel vehicle sales are projected to be approximately 1.79 million vehicles in 2010, whereas sales range between 1.68 and 1.75 million vehicles in the 1990+24%, 1990+9%, 1990+9% , and 1990-3% cases. Similar results are projected for alternative-fuel consumption as a percentage of total transportation fuel use in 2010. Although the projected cost of driving per mile is lower for some alternative-fuel vehicles than for gasoline vehicles in some of the carbon reduction cases, it would still be more costly to drive an alternative-fuel vehicle than a gasoline vehicle. The purchase prices for most alternative-fuel vehicles still would be higher than those for conventional gasoline-powered vehicles, and additional driving costs would be incurred as the result of lower vehicle range and limited availability of fuel. Also, with higher projected fuel prices, vehicle-miles traveled are expected to be reduced for all vehicles, including those that use alternative fuels. Finally, the higher efficiencies of alternative-fuel vehicles would lower their total fuel consumption.

Sensitivity Cases

To examine the effects of technology improvements on energy use and prices, two sensitivity cases were analyzed for the transportation sector. The 1990+9% low technology sensitivity case was designed to hold average new vehicle fuel efficiencies at their 1998 levels throughout the forecast period. The implication is that stock turnover and travel reductions would have to compensate for the lack of fuel efficiency improvements in order to meet the carbon reduction targets. The 1990+9% high technology sensitivity case was designed to illustrate the effects of advanced fuel-saving technologies on transportation fuel efficiency, fuel consumption, and carbon emissions. This sensitivity case generally assumes that the costs of new technologies will be reduced, the marginal fuel efficiency benefits will be higher, and the advanced technologies will be commercially available at earlier dates than in the reference case or the carbon reduction cases.⁵² higher, and the advanced technologies will be commercially available at earlier dates than in the reference case or the carbon reduction cases.⁵²

Higher projected carbon prices in the low technology sensitivity case lead to higher prices for all transportation fuels. In 2010, average fuel prices in the transportation sector are projected to be 14 percent higher in the 1990+9% low technology case than in the 1990+9% case. Gasoline prices are projected to be about 19 cents per gallon higher, jet fuel prices 21 cents per gallon higher, distillate fuel prices 22 cents per gallon higher, and residual fuel prices 26 cents per gallon higher.

Both fuel efficiency and travel are lower in the low technology case than in the 1990+9% case. Higher fuel prices would affect travel both directly and through their secondary impacts on the general levels of macroeconomic activity, disposable income, and freight movement. Of all travel modes, vehicle-miles traveled by light-duty vehicles are the most responsive to the higher fuel prices in the 1990+9% low technology case, with a 5.1-percent reduction from the projected level in the 1990+9% case in 2010. Air travel is reduced by a similar percentage, 5.5 percent, whereas smaller reductions are projected for freight, rail, and domestic shipping travel (0.8 percent, 3.1 percent, and 0.9 percent, respectively). Total projected fuel consumption in 2010 is higher in the low technology case than in the 1990+9% case, because fuel efficiency does not improve as rapidly.

Mass Transit and Carpooling

An issue for the transportation sector is whether the ratification of the Kyoto Protocol by the United States will lead to increased use of mass transit and carpooling. Automobile transportation is a major contributor to air pollution and greenhouse emissions, and a cutback in this area would be desirable. U.S. transportation patterns make this unlikely, however, in spite of the fact that the carbon reduction cases in this analysis project higher gasoline prices and lower levels of vehicle-miles traveled.

The United States consumes far more energy per capita for transportation than any other developed country, with U.S. passenger travel dominated by the automobile. In 1990, about 86 percent of passenger-miles were accounted for by automobiles, and mass transit accounted for less than 4 percent. The U.S. mass transit system includes buses, light rail, commuter rail, trolleys, subways, and an array of services such as van pools, subsidized taxis, dial-a-ride services, and shared minibus and van rides. Most cities of over 20,000 population have bus systems, and buses on established routes with set schedules account for over half of all public transit passenger trips. About 70 percent of all public transit trips in 1990, however, were in the 10 cities with rapid rail systems; 41 percent were in New York City and its suburbs.^a More recent statistics show that, as of 1995, mass transit accounted for only 0.8 percent of total fuel consumption in the transportation sector.^b

One reason for the low usage of mass transit in the United States and the concentration of use in major cities is urban development that has decreased the importance of historic central business districts (CBDs). Peak trips in general, and work trips in particular, have become diffuse in both origin and destination and thus not easily served by mass transit. In 1980 only 9 percent of the workers in urban areas and only 3 percent of workers living outside the central city were employed in the CBDs.^c (In Europe, where population densities are much higher, access to the workplace is much easier.) Other factors that work against mass transit in the United States are a past history of low gasoline prices, rising income levels, increasing numbers of women in the workforce with needs to drop off and pick up children at child care facilities, a move toward less standardization of work hours, and premiums placed on personal independence and time saved by driving rather than making use of mass transit. The same factors affect the use of carpooling.

Available statistics support the contention that the lower levels of vehicle-miles traveled associated with the carbon reduction cases do not necessarily imply increased use of mass transit. According to the American Public Transit Association, all forms of mass transit in terms of passenger-miles decline during periods of high fuel prices.^d Transit rail passenger-miles, which include light and heavy rail travel, declined by nearly 10 percent from 1973 to 1974 and by 5 percent from 1979 to 1981, even though real gasoline prices concurrently rose by 28 percent during both periods. Similar trends occurred in commuter rail, which experienced declines of almost 8 percent from 1980 to 1982. Between 1979 and 1982, transit bus passenger-miles declined by 7 percent and intercity bus travel by 1 percent, while real gasoline prices increased by 15 percent. A counter example is the period from 1973 to 1974, when transit bus use rose by 11 percent, and intercity bus passenger-miles increased by 5 percent. That period was unique, however, because gasoline was often either unavailable or required waits of up to several hours in gas station lines.

Carpooling trends, according to the U.S. Census Bureau, have declined from approximately 20 percent of the workforce in 1980 to just over 13 percent in 1990.^e The National Personal Transportation Survey has reported similar trends in vehicle occupancy rates, which indicate that from 1977 through 1990, vehicle occupancy rates have declined in commuting to and from work, from 1.30 to 1.14 person-miles per vehicle mile.^f These occupancy rates correspond to about one-third of total vehicle-miles traveled.

Because travelers do not take into account such externalities as reducing greenhouse gas emissions when making their transportation decisions, and past gasoline price increases do not seem to have had an impact, it is unlikely that mass transit and carpooling will increase in the United States without policy intervention factors such as higher gasoline taxes and urban and transportation planning that facilitates access to workplaces. There are differing opinions as to the role these factors could play in shaping travel patterns. If history, geography, income, and demographics are the primary determinants of travel patterns, policy may play only a minor role in changing energy use; but if instruments of public policy are primary travel determinants, then there is a large potential for policy to reduce energy use^g and alter mass transit and carpooling patterns.

^aU.S. Congress, Office of Technology Assessment, Saving Energy in U.S. Transportation, OTA-ETI-589 (Washington, DC, July 1994), pp. 5-6.

^bS. Davis, Transportation Energy Databook No. 17, prepared for the Office of Transportation Technologies, U.S. Department of Energy (Oak Ridge, TN: Oak Ridge National Laboratory, August 1997), p. 2-12.

^cU.S. Congress, Office of Technology Assessment, Saving Energy in U.S. Transportation, OTA-ETI-589 (Washington, DC, July 1994), pp. 5-6.

^dAmerican Public Transit Association, 1994-1995 Transit Fact Book (Washington, DC, February 1995), pp. 106-107.

^eS. Davis, Transportation Energy Databook No. 17, prepared for the Office of Transportation Technologies, U.S. Department of Energy (data provided by the Journey-to-Work and Migration Statistics Branch, Population Division, U.S. Bureau of the Census) (Oak Ridge, TN: Oak Ridge National Laboratory, August 1997), p. 2-12.

^fFederal Highway Administration, National Personal Travel Survey: 1990 NPTS Databook, Vol. II, Chapter 7 (Washington, DC, November 1993).

^gU.S. Congress, Office of Technology Assessment, Saving Energy in U.S. Transportation, OTA-ETI-589 (Washington, DC, July 1994), pp. 5-6.

With lower carbon prices and lower fuel prices in the 1990+9% high technology sensitivity case, more travel is expected than in the 1990+9% case. Despite the higher travel projection, however, more rapid improvements in new vehicle and stock fuel efficiencies result in lower fuel consumption in the high technology case, with higher fuel efficiencies outweighing the projected increases in vehicle-miles traveled that result from lower projected fuel prices. Average transportation fuel prices in 2010 are 9.6 percent lower in the 1990+9% high technology sensitivity case than in the 1990+9% case. Gasoline prices are projected to be 14 cents per gallon lower in 2010, jet fuel prices 13 cents per gallon lower, distillate fuel prices 14 cents per gallon lower, and residual fuel prices 16 cents per gallon lower.

Comparing across the travel modes, light-duty vehicles hold the greatest potential for reducing fuel consumption and carbon emissions with more rapid technology advances (Figure 64). Not only do light-duty vehicles consume more fuel in total than the other vehicle types (more than 56 percent of all transportation fuel use in 1996), they also have the greatest potential for advanced technology penetration. In the 1990+9% high technology sensitivity case, light-duty vehicles are projected to account for 65 percent of the reduction in transportation fuel use relative to the 1990+9% case, compared with 20 percent for trucks, 11 percent for aircraft, 4 percent for rail, and 1 percent for marine.

Fuel-saving technologies for conventional light-duty vehicles in the high technology case are assumed to have approximately 50 percent lower marginal technology costs and 30 percent higher marginal fuel efficiency improvements than those for gasoline vehicles. All conventional technologies achieve lower sales penetration rates in the high technology case than in the 1990+9% case, due to lower fuel prices (Table 11); however, because the marginal fuel efficiencies are also higher than in the 1990+9% case, the total fuel efficiency improvement is larger in the high technology case.

With lower marginal costs and earlier introduction dates in the high technology sensitivity, most new aircraft technologies reach significantly higher penetration rates than in the 1990+9% case with reference technology (Table 12). The penetration rate for ultra-high-bypass engines is lower in the high technology case, because they are partially displaced by advanced thermodynamic engines. Substantial fuel efficiency improvements result from the penetration of weight-reducing materials, advanced aerodynamics, and advanced thermodynamic engines, which can potentially achieve efficiency improvements of 15 percent, 18 percent, and 20 percent, respectively.

Fuel efficiency for new freight trucks rises by more than 1 mile per gallon by 2010 in the high technology case relative to the 1990+9% case, primarily because of the penetration of the turbo compound diesel, LE-55 heat engine, improved tires and lubricants, and electronic engine controls on heavy-duty trucks (Table 13). Both advanced engine technologies—the turbo compound diesel and LE-55 heat engine—are diesel technologies, which improve fuel economy by 10 percent and 23 percent, respectively.

The high technology case assumes that the U.S. Department of Energy Office of Transportation Technologies program goals⁵³ for alternative-fuel vehicle cost and performance improvements will be met. Generally these program goals include a reduction of 50 to 66 percent in the marginal price difference between comparable gasoline vehicles and electric or electric hybrid vehicles, and a 75-percent reduction in the difference for fuel cell vehicles. Fuel efficiency improvements are assumed to be 230 to 300 percent greater for electric and electric hybrid vehicles and 250 percent greater for fuel cell vehicles than for gasoline vehicles. These fuel efficiency improvements are also assumed to result in travel ranges that are 57 percent greater for electric hybrid vehicles and 20 percent greater for fuel cell vehicles than the range for similar sized gasoline vehicles. Total alternative-fuel vehicle sales in the 1990+9% high technology case in 2010 are projected to make up almost 19 percent of all light-duty vehicle sales, compared with just over 11 percent in both the reference and 1990+9% cases. The projected shares for different alternative-fuel vehicle types are shown in Table 15.

In order for alternative-fuel vehicles to displace large quantities of gasoline use, they must penetrate the market early enough to replace gasoline vehicles and then sustain high sales volumes. Displacement of gasoline may be limited, however, because the vast majority of the projected increase in alternative-fuel vehicle sales consists of alcohol flexible-fuel vehicles, which are expected to have only slightly higher fuel efficiencies than gasoline vehicles. They will also use only 15-percent blends of E85 and M85 and will more frequently be consuming gasoline than the alternative fuel.

For alternative-fuel vehicles to maintain a larger share of the vehicle market, they will need to have lower costs, higher performance, and earlier availability dates than projected in this analysis. Simultaneously, higher fuel prices will be needed to send market signals to both consumers and vehicle producers. The high technology case indicates both of these points: fuel-saving technology becomes available and is purchased in 2005, but its advantage is quickly offset by reductions in gasoline consumption, which lead to lower gasoline prices. Consequently, as fuel prices begin to decline after 2008, consumers tend to demand higher performance and larger vehicles, and manufacturers respond by designing and producing larger, more profitable models, such as sport utility vehicles.